Characteristics of wealth-creating countries

More from the management notes archives. David Landes (upper left); Niall Ferguson (lower right)

Landes and Ferguson provided excellent, separate summaries of the factors that explain the success of western societies in their strategic, sustainable elements creating wealth.

Both implicitly reject the idea that imperialism, colonialism and wealth acquisition were the basis for the success of "the West" in creating enduring prosperity. Using extensive research, data analysis and critical thinking both men identified six different yet quite similar characteristics of these wealth-crating economies.

To make the point in class, I would start by embedding Landes' six characteristics in a list of potential explanations, to use as a test of the students' preconceived notions as to the root causes of wealth creation, including their unconscious bias, stereotypes and false lessons learned from their previous education. To make things interesting, the embedded characteristics test follows. See how well you can do in picking out the six characteristics before proceeding to the 'key' with the six characteristics listed and then analyzed following the 'quiz'.

David Landes deduced six strategies of his own, to address the question, “Why have some countries prospered while others lagged in economic development?” His research led him to conclude that successful countries demonstrate strategies or patterns of behavior that support wealth creation that enhanced material human progress. Select these six key characteristics of growth-and-development societies. Don't proceed to the answers until you have made your six selections. Write down the six numbers of those you choose; don't just keep the numbers in your head. If you prefer, choose seven or eight to hedge your bet.

1. Established and maintained a strong, modern military force.

2. Trained workers through a system of vocational and apprentice programs.

3. Shifted from an industrial economy to a knowledge economy by government planning.

4. Produced goods first for sale to foreign markets, putting domestic consumption second.

5. Knew how to operate, manage, and build the instruments of production.

6. Created a culture of acquisitiveness, economic growth, and private financial gain.

7. Supported cultural and social programs designed to improve the country’s quality of life.

8. Found their land to be ideal for agriculture and rich in natural resources and minerals.

9. Able to impart knowledge to the young, through education or apprenticeship training.

10. Established taxation and social programs to maintain a relatively fair distribution of wealth.

11. Created a public system of infrastructure projects to support transport and commerce.

12. Chose people for jobs by competence, merit. Promoted and demoted based on performance.

13. Enjoyed natural transportation features, e.g., navigable rivers, ice-free ports and ocean access.

14. Developed decentralized, enlightened market policies for agriculture, energy and industry.

15. Created a central banking system for investment, risk reduction, and the protection of savings.

16. Knew how to create, adapt and master new techniques on the technological frontier.

17. Encouraged immigration with open borders, and rapid naturalization to citizenship.

18. Were early adopters of rail transport to promote industrial growth and domestic commerce.

19. Encouraged immigration of experienced, skilled and educated workers to boost productivity.

20. Emphasized an industrious work ethic through the educational and employment system.

21. Limited the government’s role primarily to defense, public safety, and the legal system.

22. Administered public services with educated managers rather than with political appointees.

23. Developed an extensive private education university system to supplement public colleges.

24. Encouraged collaboration among domestic corporations to increase foreign competitiveness.

25. Managed trade to protect new and developing products, companies, industries, and sectors.

26. Encouraged initiative, competition, and emulation of success.

27. Provided employment opportunity without regard to race, gender, or religious beliefs.

28. Supported direct foreign investment with tax incentives and high tariffs for imports.

29. In education, emphasized a culture of military and political heroes as role models.

30. Afforded individual or collective enterprise; allowed people to enjoy the fruits of their labor.

Only scroll down after you have your list of six characteristics written down.

As important as the production and economic strategies are in the wealth creation process, social, legal and political factors are key societal underpinnings of these economic drivers that create a climate for wealth creation. We can summarize these social, political and legal societal infrastructure needs as rights, rules and responsibilities.

03 Secure rights of private property, to encourage saving and investment

05 Secure rights of personal liberty against the abuses of tyranny and private disorder.

08 Enforce rights of contract, explicit and implicit.

09 Provide stable government, not necessarily democratic, governed by rules.

11 The majority wins but does not violate the rights of the losers.

13 Provide responsive government that hears complaints, makes redress.

15 Provide honest government, actors are not moved to seek advantage and privilege.

24 Provide moderate, efficient, ungreedy government.

These two sets of conditions also reflect something that we will explore in more depth later, namely economic freedom (Development I) and political freedom (Development II).

Notes on Development

1. In brief, business creates wealth and serves customers while government provides the needed national and domestic peace and security, education and the rule of law to allow people and markets to thrive. Sustainable markets require an informed customer and a well-educated work force.

2. Success has roots in common cultural (political and economic) characteristics that translate diverse economic resources into wealth, prosperity, human development, and the quality of life.

3. Landes notes a single characteristic separates American culture from other wealth-developing countries: Individualism. This characteristic positively impacts the entrepreneurial activity, self-reliance, personal responsibility and initiative needed for wealth creation.

4. America is more of a ‘salad bowl’ than a ‘melting pot.’ Great differences in race, religion, language, food preferences, are widespread. It is the critical parts of the common culture – personal and social beliefs and values – that determine wealth creation.

Niall Ferguson: The six killer apps of Western economic culture (2011; 20:20)

Economic, political and cultural factors drove economic development in the Anglo-European West over the past five hundred years, providing faster economic growth than what the rest of the world experienced. In 1500, the West trailed Asia in terms of economic power. Western progress accelerated after 1815 with the Industrial Revolution.

In 1500, the average Chinese was richer than the average North American. When you get to the 1970s, which is where this chart ends, the average Briton is more than 10 times richer than the average Indian. And that's allowing for differences in the cost of living. It's based on purchasing power parity. The average American is nearly 20 times richerthan the average Chinese by the 1970s. Western empires, in 1500 they were really quite tiny -- five percent of the world's land surface, 16 percent of its population, maybe 20 percent of its income. By 1913, these 10 countries, plus the United States, controlled vast global empires -- 58 percent of the world's territory, about the same percentage of its population, and a really huge, nearly three-quarters share of global economic output.

Ferguson’s killer apps

Competition and choice: Europe was politically fragmented, and within each monarchy or republic there were multiple, competing corporate entities offering people choices. NOTE: Competition is not about beating your competitor, it is about offering alternatives, choices to what the competitor is offering. The market is not a zero-sum, win-lose proposition. It is the “grow the pie,” not “how do we carve this pie into pieces.”

Scientific Revolution: All the major 17th-century breakthroughs in mathematics, astronomy, physics, chemistry and biology happened in Western Europe.

Property rights: It's not the democracy, folks; it's having the rule of law based on private property rights. That's what makes the difference between North America and South America. You could turn up in North America having signed a deed of indenture saying, "I'll work for nothing for five years. You just have to feed me." But at the end of it, you've got a hundred acres of land. Rule of law and representative government: This optimal system of social and political order emerged in the English-speaking world, based on property rights and the representation of property owners in elected legislatures.

Modern medicine: Western Europeans and North Americans made all the major 19th- and 20th-century advances in health care, including the control of tropical diseases.

Consumer society: The Industrial Revolution took place where there was both a supply of productivity-enhancing technologies and a demand for more, better and cheaper goods, beginning with cotton garments.

Work ethic: Westerners were the first people in the world to combine more extensive and intensive labor with higher savings rates, permitting sustained capital accumulation.

Max Weber thought that was peculiarly Protestant. He was wrong. Any culture can get the work ethic if the institutions are there to create the incentive to work. We know this because today the work ethic is no longer a Protestant, Western phenomenon. In fact, the West has lost its work ethic. Today, the average Korean works a thousand hours more a yearthan the average German.

I want to end with three questions for the future billions, … 2016, when the United States will lose its place as number one economy to China. The first is, can you delete these apps, and are we in the process of doing so in the Western world? The second question is, does the sequencing of the download matter? And could Africa get that sequencing wrong? One obvious implication of modern economic history is that it's quite hard to transition to democracy before you've established secure private property rights. Warning: that may not work. And third, can China do without killer app number three? That's the one that John Locke systematized when he said that freedom was rooted in private property rights and the protection of law. That's the basis for the Western model of representative government.

Winston Churchill once defined civilization: "It means a society based upon the opinion of civilians. It means that violence, the rule of warriors and despotic chiefs, the conditions of camps and warfare, of riot and tyranny, give place to parliaments where laws are made, and independent courts of justice in which over long periods those laws are maintained. In civilization’s soil grows freedom, comfort and culture. When civilization reigns in any country, a wider and less harassed life is afforded to the masses of the people."

Analysis

1. With globalization and economic freedom, the Rest has been able to ‘downloaded’ some of the killer apps. The “great divergence” has given way to a “great convergence.”

2. Property rights and the consumer society empowered the Industrial Revolution, primarily by enhancing trade through innovation, choice and task specialization.

3. The work ethic – frugality, savings, deferred pleasure – can conflict with the consumer society. In a ‘welfare state,’ there are disincentives to work when benefits, prosperity and progress are unlinked from work. The combination only works if the money earned from work exceeds the money spent on consumption.

4. Capitalism requires right to own (i.e., private) property and the right to trade. These are the killer apps of property rights and the consumer society, respectively. A productive, sustainable economic requires consumption, savings, and profits. An excess of any of the three damage the economy. Balance is generally facilitated by Adam Smith’s “invisible hand.”

5. People can engage in prosocial or antisocial behavior. They can collaborate or compete. Choice must be balanced by discernment and moderation, i.e., this shows the value of the self-regulating aspect of the work ethic.

6. Prosocial management goals and prosocial leadership are the management side or version of the consumer work ethic. Prosocial management is a positive ethic, i.e., doing good, rather than simply being ‘socially responsible’ or avoiding evil.